Carpe Diem

In Euros and UK Pounds, Oil Prices Aren’t That Bad

Rising oil prices, measured in dollars, get all of the media attention, largely because oil is priced and sold in dollars in world oil markets. What has gotten much less attention is the price of oil in other currencies like British pounds and Euros, which have both appreciated vs. the USD by 16-18% over the last few years, helping to offset the higher price of oil in dollars for Europeans.

The chart above (click to enlarge) shows that oil prices in dollars have almost tripled since 2004, whereas oil prices in pounds and euro have only doubled during this period. Since July 2006, oil prices in dollars have risen more than 15% (see vertical line above), compared to modest increases over the same period of only 2.74% in euros and 4% in pounds.

Further, consider that $100 oil today is only 67.4 euros per barrel at today’s exchange rate of $1.4828/euro, compared to 114 euros per barrel at the exchange rate 5 years ago of $0.8766/euro. The double-digit appreciation of major currencies (pound, euro, Canadian dollar, Swiss franc, etc.) vs. the USD might be another factor that explains why the world economy has been able to absorb the shock of $100 oil.

From the NY Times, “Throughout Europe, the rise of the euro has acted as a hedge against fluctuations in the dollar-denominated oil market.”

Carpe Diem

Some Historical Perspective on Commercial Banks


The charts above are based on Federal Reserve commercial banking data released on Monday and available here, with updated data on a) loan charge-off rates and b) loan delinquency rates through the third quarter 2007 for all U.S. commercial banks.

As the charts show, despite all of the recent bad news and “gloom and doom” about the U.S. banking sector, the commercial banking sector might actually be surviving the subprime crisis quite well, at least so far. The charge-off rates for all bad loans (0.60%) has increased recently (top chart), but is about half the 1.2% rate in 2002, and about 1/3 the 1.75% rate in 1991. The charge-off rate for real estate loans (.19%, or only about 2 properties per 1,000) in the third quarter 2007 is almost half of the .29% rate in 2001, and less than 1/6th of the 1.2% rate in 1991.

Likewise, loan delinquency rates have increased recently (bottom chart), but are still far below the rates of the late 1980s and most of the 1990s.

On a previous CD post, I reported that not a single U.S. bank failed in either 2005 or 2006, and only 3 banks have failed in 2007. The loan charge-off and delinquency rates for U.S. commercial banks through the third quarter of 2007 indicate that our banking system is surviving the subprime crisis, without any danger of pending collapse.

Bottom Line: The U.S. banking system is probably stronger and more stable than most people give it credit for. Empirical data on bank charge-off rates and delinquency rates, at least through the third quarter 2007, suggest that banks are probably doing better than most people think.

Carpe Diem

Ethanol: “Dangerous, Delusional Bullshit”

Ethanol: Fails a Cost-Benefit Test
Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such as reducing greenhouse gas emissions, and energy security goals. This paper provides the first thorough benefit-cost analysis of increasing ethanol use beyond four billion gallons a year, and finds that the costs of increased production are likely to exceed the benefits by about three billion dollars annually. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing the ethanol tariff and the ethanol tax credit.

Abstract of a new research paper “The Benefits and Costs of Ethanol,” by Robert W. Hahn and Caroline Cecot, both of the AEI-Brookings Joint Center for Regulatory Studies.


From Robert W. Hahn’s editorial in yesterday’s WSJ:

To hear the candidates tell it — especially those on the stump in Iowa — ethanol is the answer to America’s energy-security woes. And back in Washington, politicians since 1978 have been putting your money where their mouths are: Ethanol is currently subsidized to the tune of 51 cents per gallon when blended with gasoline.

To make sure foreigners don’t share the ride on the ethanol gravy train, moreover, Congress has imposed a 54-cent tariff on imported ethanol.

Carpe Diem

Goldilocks Rocks on Black Friday, +8.3% Increase

NEW YORK (AP)The nation’s retailers had a robust start to the holiday shopping season, according to results announced today by a national research group that tracks sales at retail outlets across the country. According to ShopperTrak RCT, which tracks sales at more than 50,000 retail outlets, total sales rose 8.3% to $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4-5%.

By the way, consider that gas prices last Thanksgiving were about $2.25 per gallon, and gas prices today are about $3.09. Even with gas prices 37% higher than a year ago, consumers spent a record amount this year on Black Friday. See the post below.
Carpe Diem

Why The Goldilocks Economy Can Handle $3 Gas

In a previous CD post “The Energy-Efficient Economy Can Handle $100 Oil,” I suggested that today’s economy is much better able to absorb higher energy prices than at any other time in the past, due to significant improvements in energy efficiency of the last 50 years. Compared to the early 1970s, the economy today is about twice as efficient, measured by energy consumption per dollar of real GDP. The graph in that post was featured on CNBC’sKudlow and Company” a few weeks ago and also appeared in Larry’s blog.

Here’s another reason that the Goldilocks economy is able to handle $3 per gallon gas without sending consumer spending into a tailspin and without causing a recession: Even at $3 per gallon, gas is still relatively affordable for today’s consumers, as a percent of disposable income, especially compared to the 1970s and 1980s.

The graph above (click to enlarge) shows the cost of 1,000 gallons of gas at the average retail price (using EIA data) as a percent of per-capita disposable income (from the BEA), from 1974-2007. Consider that since gas prices peaked in the early 1981 at about $1.40 per gallon, retail gas prices have increased by 2.21 times to $3.099 per gallon today. But per-capita disposable income has increased during that same period by more than 3.5 times, from $9591 in 1981 to $33,940 today.

In the early 1980s, it would have taken almost 15% of per-capita disposable income to buy 1,000 gallons of gas, and today it only takes only 8.5% (third quarter 2007). Even back in the “good old days” when gas sold for 50-60 cents per gallon in the mid-1970s, gas was more expensive as a share of income (10-11%) than today.

Bottom Line: Measured as a share of per-capita disposable income, gas prices would have to rise all the way to $5 per gallon today to be as expensive as gas in the early 1980s. Even if gas gets to $3.76 per gallon, it would be equivalent to 50 cent gas in the “good old days” of the mid-1970s, when measured as a share of disposable income. Goldilocks can handle $3 gas, no problem.
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Libertarian Drew Carey on Medical Marijuana

One of the most outrageous consequences of the war on drugs is the federal crackdown on medical marijuana, which is used by patients to help treat the effects of cancer, glaucoma, HIV-AIDS, chronic pain and nausea, and other severe symptoms associated with serious illnesses. Medical marijuana prescribed by a physician is legal in 12 states, yet federal agents are raiding state-approved dispensaries and preventing patients from having safe access to this drug.

In Episode 2 of Reason.tv’s Drew Carey Project, Drew takes a look at patients who need and use medical marijuana in California, and how the federal government is making their lives even worse.

Carpe Diem

Bank Stocks Rebound by 2.5%, Keepin’ Hope Alive

In some “Black Friday bargain hunting,” the broader stock market indexes rebounded today by about 1.4% (see chart above, SP=red line, DJ=black and NASDAQ=green), and bank stocks rebounded at almost twice that rate (about 2.5%) as measured by the NASDAQ Bank Index (blue line above).

Maybe there’s hope.

(P.S. I’ll probably retire from intraday prognasticatin’, and wait until the market has closed to do my analyses.)
Carpe Diem

Weak Dollar = Strong Christmas Sales for Europeans

Returning to Iceland After Shopping Bender
at the Mall of America

MINNEAPOLIS Andrea Guðjónsdóttir arrived in Minnesota from Iceland last week with nothing but the clothes on her back. Oh, and two empty suitcases, which she promptly filled to near-bursting with clothes, toys and other gifts during a five-day shopping spree in the Twin Cities.

“Everything’s so cheap,” said Guðjónsdóttir, 35, who lives in Akranes, a seaport city on Iceland’s west coast. “You can pay $30 for Levi’s here; at home, it’d be $200.”

Guðjónsdóttir joins a growing number of shoppers across the world who are coming to the U.S. — and Minnesota — this holiday season to take advantage of good deals against the falling dollar. At a time when the U.S. economy is sagging, retailers say foreign tourists are providing a hedge against a Christmas season that’s expected to be the slowest in five years.

Carpe Diem

The Only Way to Follow People Over Time is To Follow People, Not Income Brackets or Quintiles

There are wild cards that need to be kept in mind when you hear income statistics thrown around. One of these wild cards is that most Americans do not stay in the same income brackets throughout their lives. Millions of people move from one bracket to another in just a few years.

What that means statistically is that comparing the top income bracket with the bottom income bracket over a period of years tells you nothing about what is happening to the actual flesh-and-blood human beings who are moving between brackets during those years.

Following trends among income brackets over the years creates the illusion of following people over time. But the only way to follow people is to follow people.

That is why the IRS data, which are for people 25 years old and older, and which follow the same individuals over time, find those in the bottom 20 percent of income-tax filers almost doubling their income in a decade. That is why they are no longer in the same bracket.

That is also why the share of income going to the bottom 20 percent bracket can be going down, as the Census Bureau data show, while the income going to the people who began the decade in that bracket is going up by large amounts.

~Thomas Sowell in “Income Confusion